UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1999
Commission File Number 0-4186
THE SAGEMARK COMPANIES LTD.
(Exact name of registrant as specified in its charter)
(Formerly known as Consolidated Technology Group Ltd.)
New York 13-1948169
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
700 Gemini, Houston, TX 77058
(Address of principal executive offices) (Zip Code)
(281) 488-8484
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
Number of common shares outstanding as of November 12, 1999 1,552,525
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<PAGE>
The Sagemark Companies Ltd.
Index
Page
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Part I: - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations - Unaudited
- Three and Nine Months Ended September 30, 1999 and 1998 3
Condensed Consolidated Statements of Comprehensive Income
(Loss) - Unaudited - Three and Nine Months Ended September
30, 1999 and 1998 4
Condensed Consolidated Balance Sheets - September 30, 1999
(Unaudited) and December 31, 1998 5
Condensed Consolidated Statements of Cash Flows - Unaudited
- Nine Months Ended September 30, 1999 and 1998 6
Notes to Unaudited Condensed Consolidated Financial Statements 7-17
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations 18-27
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
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The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Operations - Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating expenses:
Other general and administrative expense $ 212,000 $ 226,000 $ 456,000 $ 558,000
Salaries, payroll taxes and fringe benefits 185,000 168,000 529,000 624,000
Professional fees 95,000 313,000 771,000 717,000
Consulting fees 3,000 66,000 78,000 179,000
Termination payments for executive contracts -- -- 48,000 2,189,000
Settlement costs -- 505,000 38,000 535,000
Related party bad debt expense -- -- -- 135,000
-------------- -------------- -------------- --------------
Loss from operations (495,000) (1,278,000) (1,920,000) (4,937,000)
Gain (loss) from marketable securities 385,000 (20,000) 1,447,000 (30,000)
Other income, net 113,000 (69,000) 127,000 73,000
-------------- -------------- -------------- --------------
Income (loss) from continuing operations before minority
interest and share of loss of unconsolidated affiliate 3,000 (1,367,000) (346,000) (4,894,000)
Minority interest in income of subsidiaries -- 129,000 (296,000) 31,000
Share of income (loss) of unconsolidated affiliates -- 51,000 113,000 (83,000)
-------------- -------------- -------------- --------------
Income (loss) from continuing operations 3,000 (1,187,000) (529,000) (4,946,000)
Discontinued operations:
Income (loss) from operations of discontinued segment -- (495,000) 637,000 (1,296,000)
Gain from disposal of segment -- 10,000 8,124,000 6,792,000
-------------- -------------- -------------- --------------
Income (loss) before extraordinary item: 3,000 (1,671,000) 8,232,000 550,000
Extraordinary gain on debt extinguishment -- 5,627,000 -- 5,627,000
-------------- -------------- -------------- ---------------
Net income $ 3,000 $ 3,955,000 $ 8,232,000 $ 6,177,000
============== ============== ============== ==============
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ 0.00 $ (0.73) $ (0.34) $ (3.01)
Income (loss) from operations of discontinued segment -- (0.30) 0.41 (0.79)
Gain from disposal of segment -- 0.01 5.19 4.14
Extraordinary gain on debt extinguishment -- 3.45 -- 3.42
-------------- -------------- -------------- --------------
Net income $ 0.00 $ 2.43 $ 5.26 $ 3.76
============== ============== ============== ==============
Weighted average number of common shares 1,558,319 1,630,065 1,564,043 1,642,049
============== ============== ============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
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The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income - Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 3,000 $ 3,955,000 $ 8,232,000 $ 6,177,000
Other comprehensive income (expense):
Unrealized holding gains on available for sale
securities 661,000 127,000 1,469,000 277,000
Reclassification for realized (gains) losses on
available for sale securities (346,000) (32,000) (433,000) (22,000)
Comprehensive income $ 318,000 $ 4,050,000 $ 9,268,000 $ 6,432,000
============== ============== ============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
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The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
1999 December 31,
Unaudited 1998
--------- ----
<S> <C> <C>
Assets:
Cash and cash equivalents $ 2,764,000 $ 179,000
Note receivable 3,226,000 --
Marketable securities, current 1,485,000 5,092,000
Other current assets 28,000 17,000
Net current assets of discontinued segment -- 926,000
---------------- ---------------
Current assets 7,503,000 6,214,000
Investment in non marketable securities 950,000 --
Other assets 496,000 420,000
Marketable securities, long-term 318,000 2,000
Net assets of discontinued segments -- 3,979,000
Investment in unconsolidated affiliate -- 760,000
--------------- ---------------
Total assets $ 9,267,000 $ 11,375,000
=============== ===============
Liabilities and shareholders' equity (deficit):
Liabilities:
Net current liabilities of discontinued segments $ 637,000 $ 4,194,000
Other current liabilities 143,000 186,000
Accounts payable 48,000 452,000
Accrued litigation settlement costs -- 843,000
--------------- ---------------
Current liabilities 828,000 5,675,000
--------------- ---------------
Minority interest -- 6,367,000
Shareholders' equity (deficit):
Preferred stock 3,000 3,000
Common stock (25,000,000 shares authorized, 1,632,621 shares issued and
1,552,525 shares outstanding as of September 30, 1999 and 1,635,133 shares
issued and 1,595,583 shares outstanding as of December 31, 1998)
16,000 16,000
Additional paid-in-capital, common stock 58,155,000 58,188,000
Accumulated other comprehensive income 1,088,000 52,000
Accumulated deficit (50,576,000) (58,808,000)
Less common stock in treasury (247,000) (118,000)
--------------- ---------------
Total shareholders' equity (deficit) 8,439,000 (667,000)
--------------- ---------------
Total liabilities and shareholders' equity (deficit) $ 9,267,000 $ 11,375,000
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
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The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Cash Flows - Unaudited
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Net cash used in continuing operations $ (3,147,000) $ (5,683,000)
Net cash used in discontinued operations 12,000 (1,713,000)
--------------- ---------------
Net cash used in operating activities (3,159,000) (7,396,000)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 10,418,000 2,480,000
Investment in marketable securities (3,220,000) (8,000,000)
Investment in non marketable securities (950,000) --
Net proceeds for disposal of segments 855,000 14,994,000
Advances made on notes receivable (1,060,000) --
Other net investing activities (44,000) 20,000
Cash of affiliate converted to an equity method investment -- (855,000)
--------------- ---------------
Net cash provided by investing activities 5,999,000 8,639,000
--------------- ---------------
Cash flows from financing activities:
Other net financing activities (162,000) (101,000)
Repayment of discontinued segments liabilities (93,000) (1,620,000)
--------------- ---------------
Net cash used in financing activities (255,000) (1,721,000)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 2,585,000 (478,000)
Cash and cash equivalents at beginning of period 179,000 871,000
--------------- ---------------
Cash and cash equivalents at end of period $ 2,764,000 $ 393,000
=============== ===============
Supplemental disclosures of cash flow information: Cash paid for:
Interest -- $ 12,000
=============== ===============
Income taxes $ 36,000 --
=============== ===============
</TABLE>
See notes to condensed consolidated financial tatements.
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
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(1) Basis of Presentation - In the opinion of the Company, the accompanying
unaudited financial statements contain all adjustments (consisting of only
normal, recurring accruals) necessary to present fairly the financial position
of The Sagemark Companies Ltd. and Subsidiaries (the "Company") as of September
30, 1999 and December 31, 1998, the statements of operations and the statements
of comprehensive income for the three and nine month periods ended September 30,
1999 and 1998 and the statements of cash flows for the nine month periods ended
September 30, 1999 and 1998.
(2) At the annual shareholders meeting held July 22, 1999, the shareholders,
among other things, approved a change in the name of the Company from
"Consolidated Technology Group, Ltd." to "The Sagemark Companies Ltd.", approved
a decrease in the authorized number of common shares from 50,000,000 shares to
25,000,000 shares and approved a 1-for-30 reverse split. All common
share-related data included in these financial statements have been restated to
reflect the 1-for-30 reverse split.
(3) Nature of Operations - During the nine months ended September 30, 1999, the
Company consummated transactions disposing of Trans Global Services, Inc.
("Trans Global") and Arc Networks, Inc. ("Arc Networks") which consequently are
presented as discontinued operations for accounting purposes and has disposed of
a significant portion of its ownership in Netsmart Technologies, Inc.
("Netsmart"), an unconsolidated affiliate.
As a result of these transactions, the Company has no operating segments.
(a) Trans Global Transaction
Trans Global is a publicly-owned company whose stock is traded on the
NASDAQ stock market under the ticker symbol "TGSI". On February 25, 1999, the
Company, SIS Capital Corp. ("SISC") and Trans Global entered into an agreement,
pursuant to which on May 3, 1999, SISC, a wholly-owned subsidiary of the
Company, transferred to Trans Global 1,150,000 shares of Trans Global common
stock then owned by SISC, in satisfaction of (i) the Company's obligations to
pay the redemption price of $2.1 million payable with respect to its Series G 2%
Cumulative Redeemable Preferred Stock then owned by Trans Global, together with
accrued dividends of approximately $140,000 and (ii) the Company's obligations
to pay Trans Global $326,000. Trans Global returned the Series G 2% Cumulative
Redeemable Preferred Stock to the Company. As a result of this transaction, the
Company's ownership in Trans Global decreased from 40% to 14% and Trans Global
is presented as a discontinued segment in the accompanying financial statements
and the Company's remaining investment in Trans Global is accounted for as
available for sale.
(b) Arc Networks Transaction
On March 23, 1999, the Company and SISC entered into an agreement with
Arc Networks and Technology Acquisitions, Ltd., a Bermuda corporation, ("TAL"),
pursuant to which SISC sold all of its equity interest in Arc Networks for
$855,000, to TAL. The proceeds of the sale and the shares of Arc Networks were
held in escrow, until June 22, 1999, pending receipt of the consent of the New
York Public Service Commission to the sale of the shares to TAL. TAL is a
privately owned company, which on April 20, 1999 acquired a controlling
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
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interest in the Company (see footnote 4a). As a result of the sale, Arc Networks
is presented as a discontinued segment in the accompanying financial statements.
(c) Netsmart Transaction
On March 25, 1999, the Company and SISC entered into an agreement with
Netsmart and a group of purchasers, consisting principally of Netsmart's
management and directors, including Edward D. Bright (Chairman of the Board and
a director of both the Company and Netsmart at the time of the transaction) (the
"Management Investors"), whereby SISC agreed to sell an aggregate of 496,312
shares of Netsmart's common stock for an aggregate price of $1 million. The
agreement also gave the Management Investors the right to buy up to between
296,312 and 496,312 additional shares of Netsmart at the same purchase price per
share. Pursuant to the agreement, the Company had the option to not sell up to
200,000 of the additional shares. In addition, SISC agreed to transfer to
Netsmart all of its shares of Netsmart's preferred stock and warrants to
purchase shares of Netsmart's common stock, in exchange for which Netsmart
issued 100,000 shares of its common stock to the Company. During the three month
period ended June 30, 1999, SISC completed the sale of 792,624 of such shares
for approximately $1.6 million in the aggregate and notified Netsmart that it
was exercising its option to not sell 200,000 additional shares of Netsmart's
common stock to the Management Investors. The Netsmart transaction resulted in a
reduction of the Company's ownership in Netsmart from 36% to approximately 10%.
As a result of the reduction in the Company's ownership in Netsmart, the
Company's investment in Netsmart is no longer accounted for under the equity
method of accounting, which required the Company to recognize its share of
Netsmart's income or loss. As of March 31, 1999 and December 31, 1998, the
Company's investment in Netsmart, under the equity method of accounting,
amounted to $760,000 and the Company's share of Netsmart's income (loss) for the
nine months ended September 30, 1999 and 1998 was $113,000 and ($134,000),
respectively. During the three months ended September 30, 1999 the Company sold
an additional 98,125 shares of Netsmart common stock on the open market for
approximately $393,000 and as of September 30, 1999, the Company's investment in
Netsmart is classified as a current marketable security. Subsequent to September
30, 1999, the Company sold its remaining 201,875 shares of Netsmart common stock
on the open market for approximately $1.5 million.
(4) Change in Control and Management of the Company
(a) Change in Control
On April 20, 1999, TAL purchased, from certain of the Company's
shareholders, 266,667 shares, or approximately 17% of the Company's outstanding
common stock, in a private transaction at a purchase price of $7.50 per share,
or approximately $2 million in the aggregate. Contemporaneously with the
purchase, certain of the Company's shareholders granted TAL an option to
purchase an aggregate of 266,660 shares of the Company's outstanding common
stock for $10.50 per share, or approximately $2.8 million in the aggregate. The
options may be exercised at any time during the thirteen-month period commencing
March 23, 1999. The shareholders who granted the options have the right to
require TAL to exercise the options at $10.50 per share within twenty days after
TAL's receipt of notice that the Company's common stock has traded at an average
share price in excess of $13.50 for a period of ten consecutive
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
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trading days. As long as the options are outstanding, TAL has the right to vote
the 266,660 shares of common stock, representing an additional 17% of the
Company's outstanding common stock. As a result of the purchase of the 266,667
shares and the grant of the voting rights with respect to the 266,660 shares of
common stock subject to the options, TAL has voting rights with respect to
approximately 34% of the Company's common stock and may be deemed to be a
control person with respect to the Company.
(b) Change in Directors and Officers
On April 19, 1999, in anticipation of TAL's purchase of 266,667 shares
of common stock of the Company and the grant to TAL of options to purchase
266,660 additional shares of common stock of the Company, the board of directors
elected Mr. Frank DeLape as a director.
On April 20, 1999, Seymour Richter resigned as the Company's president
and chief executive officer. Simultaneously with his resignation, Mr. Richter
entered into a nine-month consulting agreement with the Company pursuant to
which he will receive an aggregate of $56,000.
On April 22, 1999, the board of directors elected Mr. Richard Young as
a director and chief operating officer of the Company and Mr. DeLape as chairman
of the board of the Company and Messrs. Richter, Bright and Chaifetz resigned as
directors of the Company. Messrs. DeLape and Young were re-elected as directors
at the July 22, 1999 shareholders meeting.
On April 22, 1999, the board of directors also approved three-year
employment agreements between the Company and Messrs. DeLape and Young pursuant
to which they will receive annual salaries of $250,000 and $135,000,
respectively. The agreements require Mr. DeLape to devote such time as is
necessary to perform his duties as chairman of the board and chief executive
officer of the Company and Mr. Young to devote his full time to the performance
of his duties as president and chief operating officer of the Company. The
agreements provide for annual cash bonuses, annual equity incentive awards
including grants of restricted stock and stock options, certain fringe benefits
and severance compensation.
Subsequent to April 22, 1999, the new board also elected Mr. DeLape as
chief executive officer and Mr. Young as president of the Company in addition to
their respective positions as chairman of the board and chief operating officer.
Mr. DeLape is also a director and president of TAL.
Pursuant to an agreement dated May 24, 1999, (the "Termination
Agreement") between the Company and George W. Mahoney, Chief Financial Officer,
the Amended and Restated Employment Agreement dated as of June 16, 1998, as
amended, between the Company and Mr. Mahoney (the "Employment Agreement") was
terminated on May 25, 1999. In consideration of the termination of the
Employment Agreement, the Company paid Mr. Mahoney $48,000 in full satisfaction
of any salary, unreimbursed expenses, fringe benefits, severance payments and
other compensation owed to Mr., Mahoney. Mr. Mahoney's rights to indemnification
survive the
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
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consummation of the Termination Agreement. Effective as of May 25, 1999, Mr.
Richard Young, in addition to his other duties, is acting as the Company's Chief
Accounting Officer.
(c) Issuance of Stock Options and Warrants
Pursuant to their respective employment agreements, the Company granted
Messrs. DeLape and Young options to purchase 400,000 and 250,000 shares of the
common stock of the Company, respectively, at $4.20 per share, being the closing
price of the Company's common stock on April 20, 1999. Subsequently, Mr. DeLape
transferred 150,000 of his options to his assignees. Both of such options become
exercisable only upon the Company's aggregate market capitalization being at
least $25 million. The options provide the holders with stock appreciation
rights, which can be exercised to the extent that the options are exercisable.
Additionally, the employment agreements provide Messrs. DeLape and Young with
the right to purchase from the Company, on the last business day of each fiscal
year during the term thereof, an additional option with respect to 250,000 and
100,000 shares, respectively, of common stock of the Company, exercisable at the
closing price of the Company's common stock on the business day immediately
prior to the date of purchase, any such options being subject to performance
objectives to be agreed upon by the board and such persons for each such year
The purchase price for any additional options shall be determined by the
Company's independent accountants based on a Black-Scholes valuation
methodology. All of such options were approved at the July 22, 1999 annual
shareholders' meeting.
In connection with Mr. Bright's resignation as chairman of the board,
the board of directors approved the issuance to Mr. Bright of a three-year
warrant to purchase 3,333 shares of the common stock of the Company at $4.50 per
share, being the closing price of the Company's common stock on such date.
(5) Accounting Policies - The accounting policies followed by the Company are
set forth in Note 1 to the Company's financial statements in the December 31,
1998 Form 10-K.
(6) Interim Results - The results of operations for the three and nine month
periods ended September 30, 1999 and 1998 are not necessarily indicative of the
results to be expected for the full year.
(7) Earnings Per Share - All earnings per share data has been restated to
reflect the 1-for-30 reverse split which was approved at the July 22, 1999
annual shareholders meeting. Basic earnings per share reflects the amount of
income for the period available to each share of common stock outstanding during
the reporting period. Diluted earnings per share reflects basic income per
share, while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock. The
computation of diluted earnings per share does not assume conversion, exercise,
or contingent issuance of securities that would have an antidilutive effect on
earnings per share, i.e., increasing earnings per share or reducing loss per
share. The dilutive effect of outstanding options and warrants and their
equivalents are reflected in dilutive earnings per share by the application of
the treasury stock method which recognizes the use of proceeds that could be
obtained upon the exercise of options and warrants in
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
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computing diluted earnings per share. It assumes that any proceeds would be used
to purchase common stock at the average market price of the common stock during
the period. As of September 30, 1999, the Company does not have any dilutive
items and therefore, a dual presentation of earnings per share is not presented.
A warrant to purchase 33,333 shares of common stock at $22.50 per share was
outstanding during all of 1999 and 1998 and options to purchase an aggregate of
678,333 shares of common stock at prices ranging from $4.20 to $7.50 per share
which were outstanding during the three and nine months ended September 30,
1999, were not included in the computation of diluted earnings per common share
because the exercise prices of said warrant and options was greater than the
average market price of the common shares. The warrant, which expires October 1,
1999, and the options were outstanding at September 30, 1999. Such outstanding
items may dilute earnings per share in the future.
(8) Treasury Stock - In October 1998, the Board of Directors authorized the
Company to repurchase its common stock in unsolicited open market transactions
in amounts of up to $500,000. As of September 30, 1999, the Company had
repurchased 80,096 shares in transactions with an aggregate purchase price of
approximately $247,000.
(9) Notes Receivable
Note Receivable from William Baquet
On September 27, 1999 the Company loaned $675,000 to William Baquet as
evidenced by Mr. Baquet's promissory note in favor of the Company. The note
bears interest at 8% and matures on December 28, 1999 on which date all
principal and interest are due. In accordance with the terms of the loan
agreement, the Company advanced Mr. Baquet $660,000 which reflects the $675,000
note amount less a $15,000 loan origination fee. The loan is collateralized by
the Company's receipt of 400,000 shares of the common stock of I-Link, Inc.
("I-Link"), which had a value at September 30, 1999 of approximately $1 million.
If the I-Link shares trade at or below $2.00 per share, or trade below $2.25 per
share on any three consecutive trading days while the loan remains outstanding,
the Company may sell the 400,000 shares and use the proceeds to satisfy amounts
outstanding under the loan. Furthermore, the Company received an option to
purchase up to 15,000 shares of the common stock of I-Link at an exercise price
of $0.01 per share. Such options vest in installments of 5,000 shares each, on
December 29, 1999, on January 12, 2000, and on January 26, 2000, with respect to
each such date provided that the loan has not been repaid in full. As additional
consideration for extending the loan, Mr. Baquet sold the Company 25,000 shares
of I-Link for $250 and such shares currently have a value approximating $63,000.
Note Receivable from Arc Networks:
In September of 1998, the Company provided Arc Networks with a $2
million line of credit collateralized by all of the assets of Arc Networks and
bearing interest at prime plus 2%. During the three months ended March 31, 1999,
the Company increased the line of credit and advanced Arc Networks an additional
$400,000. From February 1999 through May 19, 1999, the
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
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line of credit owed to the Company by Arc Networks was in default for
non-payment of scheduled interest and loan maintenance fees.
The loan principal repayment terms prior to the execution of the
Modified Arc Loan Agreement required a June 22, 1999 repayment of $150,000 and a
September 22, 1999 repayment of the remaining balance. TAL had guaranteed the
$150,000 principal payment, which prior to the Modified Loan Agreement was due
on June 22, 1999. On June 17, 1999, the Company entered into an amended guaranty
with TAL whereby TAL guarantees to pay the Company $150,000 in the event that
Arc Networks fails to make any principal repayments on the modified scheduled
due dates. Pursuant to the Modified Loan Agreement, $750,000 was due on the
earlier of October 19, 1999 or the receipt by Arc Networks' parent Company,
InfoHighway Communications Corp., ("InfoHighway", formerly referred to as Gemini
II, Inc.) of at least $10 million in gross proceeds from an initial public
offering of debt or equity securities, $450,000 is due on January 31, 2000 and
$1.2 million is due on June 19, 2000. Additionally, the Company has the right to
convert an aggregate of $1.7 million of the principal amount into common shares
of either Arc Networks or InfoHighway. Simultaneously with the execution of the
Modified Arc Loan Amendment, the Company received a warrant to purchase 90,000
shares of InfoHighway at an exercise price of $8.00 per share. The terms of the
loan were modified again to extend the due date of the October 19, 1999 until
November 14, 1999. As of September 30, 1999, total outstanding principal,
interest and loan maintenance fees due under the line of credit approximated
$2.5 million
Pursuant to the terms of a modified loan agreement entered into on May
19, 1999, (the "Modified Arc Loan Agreement") the interest rate was changed to
14% per annum effective June 18, 1999 and Arc Networks was required to pay
$50,000 of the accrued and unpaid interest by June 30, 1999 and was required to
pay the $83,000 balance of all unpaid interest accrued through July 31, 1999 on
or before August 5, 1999. The June 30, 1999 interest payment of $50,000 was paid
by Arc Networks on July 9, 1999. Arc Networks failed to make the $83,000 payment
due on August 5, 1999 and has not paid the August and September interest
payments and the loan is in default. As of September 30, 1999, total accrued and
unpaid interest receivable and loan maintenance fees due from Arc Networks
amounted to $139,000.
On May 18, 1999 the Company entered into a sub-lease agreement with Arc
Networks whereby Arc Networks is required to reimburse the Company for rentals
paid on an office lease in New York. Pursuant to the agreement, Arc Networks is
required to pay the Company approximately $4,000 per month and must give the
Company at least 45 days notice prior to canceling such agreement. As of
September 30, 1999, $13,000 was outstanding pursuant to the sub-lease agreement.
(10) Debt Guarantees
During 1998, the Company guaranteed Arc Networks' repayment of
$1,217,000 of advances from Trans Global as represented by Arc Networks'
installment promissory note due August 31, 2003. Additionally, during 1998, the
Company guaranteed $550,000 of indebtedness that Arc Networks owes to Betei
Sefer Limlachah, a New York religious organization, represented by Arc Networks'
promissory note due January 1, 2001.
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
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(11) Investment in Non Marketable Securities
On September 7, 1999, the Company acquired 100,000 12% convertible
preferred shares of GAVELNET.COM for approximately $1 million. The preferred
shares hold standard preferences to the common shares, hold voting rights, carry
a 12% dividend, payable in-kind, and are convertible at $1.25 into 800,000
common shares of GAVELNET.COM. GAVELNET.COM is a start-up company, which was
incorporated on July 20, 1999 as a Delaware company and operates an Internet
auction site offering premium collectibles, decorative and fine art items in an
entertaining, interactive online format which targets affluent buyers.
GAVELNET.COM's preferred and common shares do not have readily determinable
values and as such are not considered marketable securities.
Concurrent with the Company's investment in GAVELNET.COM, TAL invested
$1 million under substantially the same terms. GAVELNET.COM will require
additional funding in addition to the investments described herein. Prior to the
Company's investment in GAVELNET.COM, certain affiliates and related parties of
Benchmark Equity Group ("Benchmark") acquired approximately 4.1 million common
shares, on a fully diluted basis, of GAVELNET.COM for financial investments and
services rendered that enabled GAVELNET.COM to clear significant hurdles in
validating its business model. Benchmark is a privately held company wholly
owned by Frank M. DeLape, Sagemark's Chief Executive Officer and Chairman of the
Board, which also holds 100% of TAL's voting stock.
(12) Discontinued Operations - As of the date of this report the Company has no
operating segments and all of the operations and net assets and liabilities of
its subsidiaries are presented as discontinued. Effective December 31, 1998, the
Company has accounted for Trans Global and Arc Networks, formerly the Contract
Engineering Services and Telecommunications segments, as discontinued segments.
During 1997, the Company discontinued 3D Holdings International, Inc., formerly
the Three Dimensional Products and Services segment, International Magnetic
Imaging, Inc. ("IMI"), formerly the Medical Diagnostics segment, SpecTec, Inc.
and its subsidiaries, Televend and FMX Corp., collectively the former
Electro-Optical and Electro-Mechanical Products Manufacturing segment and The
Trinity Group, Inc., formerly the Business Consulting Services segment. The
following table summarizes the financial statement information of the
discontinued segments.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (Loss) from Discontinued Operations:
Contract Engineering Services -- $ 112,000 $ 499,000 $ 275,000
Telecommunications -- (607,000) -- (1,204,000)
Medical Diagnostics -- (71,000) -- (529,000)
Intercompany Transactions -- 71,000 138,000 162,000
------ -------------- -------------- --------------
-- $ (495,000) $ 637,000 $ (1,296,000
====== ============== ============== ==============
</TABLE>
-13-
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gain (Loss) on Disposal of Segments:
Contract Engineering Services -- -- $ 759,000 --
Telecommunications -- -- 7,365,000 --
Medical Diagnostics -- -- -- $ 4,882,000
Three Dimensional Products and Services -- $ 10,000 -- 1,942,000
Electro-Optical and Electro-Mechanical
Products Manufacturing -- -- -- (31,000)
Business Consulting Services -- -- -- (1,000)
-------------- -------------- -------------- --------------
-- $ 10,000 $ 8,124,000 $ 6,792,000
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Net Current Assets of Discontinued Segments:
Contract Engineering Services -- $ 926,000
---------------
-- $ 926,000
===============
Net Long-term Assets of Discontinued Segments:
Contract Engineering Services -- $ 3,791,000
Telecommunications -- 188,000
---------------
-- $ 3,979,000
===============
Net Current Liabilities of Discontinued Segments:
Telecommunications -- $ 3,463,000
Three Dimensional Products and Services $ 482,000 482,000
Medical Diagnostics 155,000 249,000
--------------- ---------------
$ 637,000 $ 4,194,000
=============== ===============
</TABLE>
(a) Contract Engineering Services - The Company and Trans Global entered into an
agreement whereby in May 1999, SISC transferred 1,150,000 shares of Trans Global
common stock owned by it to Trans Global and Trans Global transferred all of the
Series G 2% Cumulative Redeemable Preferred Stock of the Company that it owned
to the Company and cancelled accrued dividends of approximately $140,000 and
intercompany debt obligations of approximately $326,000 owed by the Company to
Trans Global. As a result of the foregoing transaction between the Company and
Trans Global, the Company recognized a gain of approximately $759,000 during the
three months ended June 30, 1999 [See footnote (3a) Trans Global Transaction].
The revenues of the Contract Engineering Services segment approximated $11.2
million for the period from January 1, 1999 through the effective date of the
share transfer and $16.3 million and $53.5 million, respectively, for the three
and nine months ended September 30, 1998 and the operations of the Contract
Engineering Services segment are classified as income (loss) from the operations
of discontinued segments. As of December 31, 1998, the assets and liabilities of
the Contract Engineering Services segment included in the Company's consolidated
balance sheet consisted of the following:
-14-
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
December 31,
1998
----
Cash $ 35,000
Accounts receivable, net 3,923,000
Loans receivable 5,000
Prepaid expenses and other current assets 474,000
Property, plant and equipment 170,000
Goodwill 727,000
Customer lists, net 2,389,000
Deferred offering costs 236,000
Receivable, related parties 50,000
Other assets 219,000
---------------
Total assets 8,228,000
---------------
Accrued estimated losses through disposal date 128,000
Accounts payable and accrued expenses 267,000
Accrued payroll and related expenses 529,000
Income taxes payable 13,000
Current debt obligations 2,574,000
---------------
Total liabilities 3,511,000
---------------
Net assets to be disposed of $ 4,717,000
===============
Presented in the balance sheet as follows:
Net current assets of discontinued segment $ 926,000
Net long-term assets of discontinued segment 3,791,000
---------------
Net assets to be disposed of $ 4,717,000
===============
(b) Telecommunications - The Company entered into an agreement with Arc Networks
and Technology Acquisitions, Ltd. ("TAL"), pursuant to which the Company sold
all of its equity interest in Arc Networks for $855,000. As a result of the
sale, the Company recognized a gain of approximately $7.4 million during the
three months ended June 30, 1999 [See footnote (3b) Arc Networks Transaction].
The revenues of the Telecommunications segment from January 1, 1999 through the
date of the sale approximated $4 million and for the three and nine month
periods ended September 30, 1998 approximated $3.6 million and $6.7 million,
respectively. As of December 31, 1998, the assets and liabilities of the
Telecommunications segment included in the Company's consolidated balance sheet
consisted of the following:
December 31,
1998
----
Cash $ 193,000
Accounts receivable, net 2,992,000
Excess of accumulated costs over related billings 159,000
Prepaid expenses and other current assets 98,000
Property, plant and equipment 125,000
Goodwill 240,000
Customer lists, net 53,000
-15-
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
December 31,
1998
----
Deferred loan costs $ 249,000
Other assets 86,000
---------------
Total assets 4,195,000
---------------
Accrued estimated losses through expected disposal date 800,000
Accounts payable and accrued expenses 5,320,000
Excess of accumulated billings over related costs 463,000
Current debt obligations 250,000
Current portion of capitalized lease obligations 20,000
Notes payable, related parties 52,000
Long-term debt 550,000
Capitalized lease obligations 15,000
---------------
Total liabilities 7,470,000
---------------
Net liabilities to be disposed of $ (3,275,000)
===============
Presented in the balance sheet as follows:
Net long-term assets of discontinued segment $ 188,000
Net current liabilities of discontinued segment 3,463,000
---------------
Net liabilities to be disposed of $ (3,275,000)
===============
(c) Three Dimensional Products and Services - In 1997, the Company formulated a
plan to discontinue the operations of all of the subsidiaries operating in the
Three Dimensional Products and Services segment. As a result of the plan, the
Company sold one of the subsidiaries operating in the segment and wrote-off all
of the segment's remaining assets and reclassified the remaining liabilities as
net current liabilities of a discontinued segment. During the first quarter of
1998, the Company recorded an approximate $1.9 million gain on the disposal of
the segment resulting from the write-off of liabilities that the Company
believes it will not be obligated to pay. As of September 30, 1999 and December
31, 1998 the liabilities of the Three Dimensional Products and Services segment
included in the Company's consolidated balance sheet consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Accounts payable and accrued expenses $ 130,000 $ 130,000
Accrued payroll and related expenses 98,000 98,000
Accrued interest 24,000 24,000
Notes payable, related parties 95,000 95,000
Current portion of long-term debt 135,000 135,000
--------------- ---------------
Net current liabilities of discontinued segment $ 482,000 $ 482,000
=============== ===============
</TABLE>
(d) Medical Diagnostics - On April 2, 1998, the Company consummated the sale of
substantially all of the assets of International Magnetic Imaging, Inc. ("IMI")
resulting in a gain on disposal of approximately $4.9 million that was recorded
in the three months ended June 30, 1998. The revenues of the Medical Diagnostics
segment approximated $6.8 million from
-16-
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
January 1, 1998 through the date of the sale on April 2, 1998 and the operations
of the Medical Diagnostics segment are classified as income (loss) from the
operations of discontinued segments. The remaining net current liabilities of
the Medical Diagnostic segment consisted of income taxes and approximated
$155,000 and $249,000, respectively, as of September 30, 1999 and December 31,
1998.
(e) Electro-Optical and Electro-Mechanical Products Manufacturing - During 1998,
the Company sold the Electro-Optical and Electro-Mechanical Products
Manufacturing segment resulting in a loss on disposal of a segment of
approximately $31,000.
(f) Business Consulting Services - During 1998 the Company sold the Business
Consulting Services segment resulting in a loss on the disposal of a segment of
approximately $1,000.
(13) Related Party Transactions
On June 10, 1999 the Company executed an agreement between the Company
and Benchmark Equity Group, Inc. ("Benchmark") whereby the Company reimburses
Benchmark for its allocable portion of shared office and administrative support
services. Benchmark is a privately held company which is owned by Mr. DeLape,
the Company's CEO and Chairman of the Board. During the nine months ended
September 30, 1999 the Company paid Benchmark $70,000 pursuant to the agreement
and paid an additional $29,000 for reimbursement of a portion of the March 1999
and April 1999 salaries of Mr. DeLape, Mr. Young and Mr. Mathew Finch, Corporate
Secretary. Additionally, the Company paid Mr. DeLape $11,000 for furniture and
leasehold improvements sold by Mr. DeLape to the Company. The Company believes
that the amounts paid to Benchmark and Mr. DeLape approximate those that would
have been paid if the transactions had been conducted at arms length.
(14) Contingencies
In July 1999, Mitel Communications Solutions, Inc. ("Mitel") served an
amended Complaint upon the Company, impleading the Company and SISC and
purportedly served TAL, in a case commenced against Arc Networks, in the Supreme
Court of the State of New York, County of New York, entitled, Mitel
Communications Solutions, Inc. v. Arc Networks, Inc. et al., Index No. 99-600123
(Sup. Ct. N.Y. Cty., 1999). Mitel seeks to recover the sum of $1.7 million,
which it allegedly paid to Arc Networks as a pre-payment when it engaged Arc
Networks as a subcontractor for a subsequently aborted project for the New York
City Board of Education. Mitel seeks to recover the purported pre-payment with
interest against all defendants, including the Company, SISC and TAL on a
variety of legal and equitable theories. The Company, SISC and TAL have filed an
Answer denying liability, and are vigorously contesting the allegations.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-17-
<PAGE>
Item 2. Management's Discussions and Analysis of Financial Condition
and Results of Operations
Forward Looking Statements
Statements in this Form 10-Q that are not descriptions of historical
facts may be forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified in this Form
10-Q and in other documents filed by the Company with the Securities and
Exchange Commission.
Recent Developments Relating to Control
TAL owns approximately 17% of the Company's outstanding common shares
and has an option to purchase an additional 17% of the outstanding common shares
and as long as such option is outstanding has the right to vote such common
shares. As a result, TAL has voting rights with respect to 34% of the Company's
common shares and may be deemed a control person with respect to the Company.
Prior to purchasing the shares of the Company's common stock, TAL purchased the
Company's 67% interest in Arc Networks. As of September 30, 1999, Arc Networks
owes the Company approximately $2.5 million under a line of credit agreement
(see footnote 9 to the attached unaudited condensed consolidated financial
statements) and TAL has guaranteed the repayment of $150,000 of such
indebtedness. The aforementioned circumstances give rise to a potential conflict
of interest whereby TAL may have the power to determine the terms of any
agreement between the Company and Arc Networks.
Restatements
The following discussion, as it relates to the three and nine month
periods ended September 30, 1998 (the "1998 Third Quarter" and "1998 Nine Month
Period"), have been restated from the prior year's discussion to reflect the
discontinuation of Trans Global (the former Contract Engineering Services
segment) and Arc Networks (the former Telecommunications segment).
Financial Condition - Liquidity and Capital Resources
As of September 30, 1999, ("September 1999"), the Company had cash of
$2.8 million and current marketable securities of $1.5 million, which primarily
represents the Company's investment in Netsmart's common stock. The following
table calculates the working capital that the Company has available for use in
its operations as of September 1999 and December 31, 1998 ("December 1998").
-18-
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Current assets $ 7,503,000 $ 6,214,000
Current liabilities 828,000 5,675,000
--------------- ---------------
Working capital 6,675,000 539,000
Plus total net current liabilities of discontinued segments 637,000 4,194,000
Less:
Portion of total current liabilities of discontinued segments that the
Company may be obligated to pay (637,000) (731,000)
Net current assets of discontinued segments not available to the Company
-- (926,000)
--------------- ---------------
Working capital available for the Company's operations $ 6,675,000 $ 3,076,000
=============== ===============
</TABLE>
During the nine month period ended September 30, 1999 (the "1999 Nine
Month Period"), the Company's available working capital increased by $3.6
million of which approximately $2 million is the non-cash effect of the note
receivable due from Arc Networks. As of December 1998, Arc Networks was a
consolidated subsidiary and the $2 million note receivable balance was
eliminated in consolidation under generally accepted accounting principles
pursuant to Accounting Research Bulletin No. 51 "Consolidated Financial
Statements". As of September 1999, the Company has sold all of its equity
investment in Arc Networks, and accordingly, the note receivable balance is not
eliminated, resulting in an increase in current assets and therefore an increase
in working capital. As of the date of this report, the note receivable is in
default for non-payment of scheduled interest. Significant sources of cash and
investment related working capital during the 1999 Nine Month Period included
$8.4 million from the sale of US Treasury Bills, $2 million from the sale of
Netsmart common stock and $855,000 from the disposal of Arc Networks, while
significant uses of working capital included $3.2 million for the purchase of US
Treasury Bills, $1.1 million for payment of $843,000 of litigation settlements
and $238,000 of trade payables that were accrued as of December 31, 1998,
$950,000 for the investment in GAVELNET.COM, $771,000 for professional fees,
$660,000 advanced to Mr. Baquet, $529,000 for salaries, payroll taxes and fringe
benefits, $400,000 advanced to Arc Networks, $129,000 for purchases of treasury
stock and $620,000 for other operating expenses. With the principal assets
consisting of cash and cash equivalents and marketable securities, the Company's
management is seeking and evaluating a number of new business opportunities that
are focused on increasing the Company's market capitalization.
As of September 1999, the Company had guaranteed Arc Networks'
repayment of $1.2 million of advances from Trans Global as represented by Arc
Networks' installment promissory note due August 31, 2003 and $550,000 of
indebtedness that Arc Networks owes to Betei Sefer Limlachah, a New York
religious organization, represented by Arc Networks' promissory note due January
1, 2001.
In July 1999, Mitel Communications Solutions, Inc. ("Mitel") served an
amended Complaint upon the Company, impleading the Company and SISC and
purportedly served TAL, in a case commenced against Arc Networks, in the Supreme
Court of the State of New York, County of New York, entitled, Mitel
Communications Solutions, Inc. v. Arc Networks, Inc. et al., Index No. 99-600123
(Sup. Ct. N.Y. Cty., 1999). Mitel seeks to recover the sum of $1.7 million,
which it allegedly paid to Arc Networks as a pre-payment when it engaged Arc
Networks as a subcontractor for a subsequently aborted project for the New York
City Board of
-19-
<PAGE>
Education. Mitel seeks to recover the purported pre-payment with interest
against all defendants, including the Company, SISC and TAL on a variety of
legal and equitable theories. The Company, SISC and TAL have filed an Answer
denying liability, and are vigorously contesting the allegations.
Results of Operations
Loss from Operations
During 1997 and 1998, the Company discontinued all of its operating
segments and as of September 1999, has no operating revenue or gross margin. As
a result, all of the Company's loss from operations for the three month period
ended September 30, 1999 (the "1999 Third Quarter") and the 1998 Third Quarter
and the 1999 and 1998 Nine Month Periods consisted of general and administrative
expenses.
1999 and 1998 Third Quarter Operating Income (Loss)
The Company's loss from operations for the 1999 and 1998 Third Quarters
was $495,000 and $1.3 million, respectively, representing a net decrease of
$783,000, or 62%.
Components of operating expenses that decreased when comparing the 1999
and 1998 Third Quarters aggregated $800,000 and included settlement costs which
decreased by $505,000, professional fees which decreased by $218,000, consulting
fees which decreased by $63,000 and other general and administrative expense
which decreased by $14,000. Such decreases were partially offset by an increase
in salaries, payroll taxes and fringe benefits which increased by $17,000
Settlement costs for the 1998 Third Quarter were $505,000. During the
1998 Third Quarter, the Company paid $425,000 to settle claims made by former
employees of which $325,000 was paid to Lewis S. Schiller ("Mr. Schiller"), a
former CEO and Director of the Company, and $100,000 was paid to the president
of a disposed subsidiary which operated in the Electro-Optical and
Electro-Mechanical Products Manufacturing segment. Additionally, during the 1998
Third Quarter the Company accrued $80,000 for other estimated settlement costs.
No settlement costs were incurred for the 1999 Third Quarter.
Professional fees decreased $218,000, or 70%, from $313,000 for the
1998 Third Quarter to $95,000 for the 1999 Third Quarter. During the 1998 Third
Quarter, the Company incurred legal fees of $108,000 related to the disposal of
subsidiaries, $86,000 related to litigation matters and $66,000 for general and
other matters while during the 1999 Third Quarter total legal fees approximated
$69,000, resulting in an overall decrease in legal fees of $191,000.
Professional fees relating to accounting, audit and tax services decreased
$27,000 when comparing the 1999 and 1998 Third Quarters.
Consulting fees for the 1998 Third Quarter were $66,000 of which
$50,000 relates to amounts accrued pursuant to a consulting agreement with Mr.
Schiller, $15,000 relates to amounts paid to Mr. Gerry Kay, a former director of
the Company and $1,000 relates to amounts
-20-
<PAGE>
paid to a computer consulting firm. Consulting fees incurred during the 1999
Third Quarter amounted to $3,000.
Other general and administrative expense decreased $14,000, or 6%, from
$226,000 for the 1998 Third Quarter to $212,000 for the 1999 Third Quarter.
Included in other general and administrative expense for the 1999 Third Quarter
is approximately $89,000 of amounts paid to The Benchmark Equity Group
("Benchmark") for salaries, office rent and administrative support. Benchmark is
a privately held company which is owned by Mr. DeLape, the Company's CEO and
Chairman of the Board. The Company believes that the amounts paid to Benchmark
approximate those that would have been paid if the transaction had been
conducted at arms length.
Salaries, payroll taxes and fringe benefits increased by $17,000, or
10%, from $168,000 for the 1998 Third Quarter to $185,000 for the 1999 Third
Quarter. Salaries, payroll taxes and fringe benefits for the 1999 Third Quarter
consisted of $123,000 for officer salaries, $39,000 for non-officer salaries,
and $23,000 for payroll taxes and fringe benefits. Salaries, payroll taxes and
fringe benefits for the 1998 Third Quarter consisted of $25,000 for non-officer
salaries, $5,000 for payroll taxes and fringe benefits and $138,000 for
employees who were terminated during the 1998 Third Quarter.
1999 and 1998 Nine Month Period Operating Losses
The Company's loss from operations for the 1999 and 1998 Nine Month
Periods was $1.9 million and $4.9 million, respectively, a net decrease of $3
million, or 62%.
Components of operating expenses that decreased when comparing the 1999
and 1998 Nine Month Periods aggregated $3 million and included termination
payments for executive contracts which decreased by $2.1 million, settlement
costs which decreased by $497,000, related party bad debt expense which
decreased by $135,000, other general and administrative expense which decreased
by $102,000, consulting fees which decreased by $101,000 and salaries, payroll
taxes and fringe benefits which decreased by $95,000. Such decreases were
partially offset by an increase in professional fees of $54,000.
Termination payments for executive contracts decreased $2.1 million, or
98%, from approximately $2.2 million for the 1998 Nine Month Period to $48,000
for the 1999 Nine Month Period. Termination payments for executive contracts for
the 1999 and 1998 Six Month Periods relates to the termination of contracts with
Mr. Schiller, a former CEO of the Company, Ms. Grazyna Wnuk (Ms. Wnuk), a former
Secretary of the Company, and Mr. George W. Mahoney (Mr. Mahoney) the former CFO
of the Company. The contract termination payments paid to Mr. Mahoney involve
two separate employment agreements between the Company and Mr. Mahoney. During
the 1998 Nine Month Period, the Company paid Mr. Mahoney $350,000 related to a
change of control provision included in Mr. Mahoney's contract, which was in
effect at that time, and entered into an amended and restated employment
agreement with Mr. Mahoney. During the 1999 Nine Month Period, the Company and
Mr. Mahoney mutually terminated the amended and restated employment agreement
and the Company paid Mr. Mahoney $48,000 in full satisfaction of any amounts
owed to Mr. Mahoney. On March 30,
-21-
<PAGE>
1998, the Company entered into a series of agreements with Mr. Schiller and Ms.
Wnuk. Pursuant to the agreements, Mr. Schiller and Ms. Wnuk resigned as
directors and officers of the Company and its subsidiaries. In consideration for
payments of approximately $4 million to Mr. Schiller and Ms. Wnuk and the return
to the Company by Mr. Schiller of 39,667 shares of the Company's common stock he
then held, the Company purchased from Mr. Schiller and Ms. Wnuk all of their
rights under their respective employment agreements with the Company and their
stock interest in IMI. Approximately $1.6 million of the $4 million of such
payments related to Mr. Schiller's and Ms. Wnuk's stock interest in the IMI
sale. The remainder of $2.4 million related to obligations of the Company, of
which approximately $561,000 was accrued at December 1997, for commissions and
salaries payable to Mr. Schiller and Ms. Wnuk and $1.8 million related to
contract termination expense for 1998.
Settlement costs decreased $497,000, or 93%, from $535,000 for the 1998
Nine Month Period to $38,000 for the 1999 Nine Month Period. During the 1999
Nine Month Period, the Company paid $30,000 in order to settle two claims
relating to IMI, a disposed subsidiary, and $8,000 to settle a claim relating to
a disposed subsidiary which operated in the discontinued Three Dimensional
Products and Services segment. During the 1998 Nine Month Period, the Company
paid $425,000 to settle claims made by former employees of which $325,000 was
paid to Mr. Schiller and $100,000 was paid to the president of a disposed
subsidiary which operated in the Electro-Optical and Electro-Mechanical Products
Manufacturing segment. Additionally, the Company paid $20,000 to settle a claim
relating to a disposed subsidiary which operated in the discontinued Three
Dimensional Products and Services segment, paid $10,000 to settle a claim
relating to a disposed subsidiary which operated in the discontinued Audio
Products segment and accrued $80,000 for other estimated settlement costs.
Related party bad debt expense for the 1998 Nine Month Period amounted
to $135,000. During the 1998 Nine Month Period, pursuant to a settlement
agreement, the Company wrote-off $86,000 of amounts due from Televend, a company
that was sold to Mr. Schiller, and $49,000 of amounts due from Universal
International, Inc., a company of which Ms. Wnuk is the president. During the
1999 Nine Month Period no related party bad debt expense was incurred.
Other general and administrative expenses decreased $102,000, or 18%,
from $558,000 for the 1998 Nine Month Period to $456,000 for the 1999 Nine Month
Period. During the 1998 Nine Month Period other general and administrative
expenses included a credit of approximately $178,000 for negotiated trade
payable write-offs. Excluding these trade payable write-offs, actual general and
administrative expenses for the 1999 Nine Month Period were approximately
$280,000 less than those of the 1998 Nine Month Period. Significant reductions
from the 1998 Nine Month Period to the 1999 Nine Month Period included reduced
travel costs of approximately $55,000, reduced vehicle and limousine service
expenses of $68,000, reduced insurance costs of $160,000, reduced directors fees
of $35,000, reduced meals and entertainment costs of $18,000, reduced equipment,
computer and depreciation costs of $32,000, reduced office rent of $29,000 and
other net reductions of $49,000. These reductions were partially offset by the
1999 Nine Month Period expenses incurred for the July 22, 1999 shareholders
meeting, including $33,000 of printing costs and $35,000 of mailing costs.
Included in other general and administrative expense for the 1999 Nine Month
Period is approximately $99,000 of amounts paid to The Benchmark Equity Group
("Benchmark") for salaries, office rent and administrative
-22-
<PAGE>
support. Benchmark is a privately held company which is owned by Mr. DeLape, the
Company's CEO and Chairman of the Board. The Company believes that the amounts
paid to Benchmark approximate those that would have been paid if the transaction
had been conducted at arms length.
Salaries, payroll taxes and fringe benefits decreased $95,000, or 15%,
from $624,000 for the 1998 Nine Month Period to $529,000 for the 1999 Nine Month
Period. Salaries, payroll taxes and fringe benefits for the 1999 Nine Month
Period consisted of $215,000 for officer salaries, $109,000 for non-officer
salaries, $40,000 for payroll taxes and fringe benefits and $165,000 for
employees who were terminated during the 1999 Nine Month Period. Salaries,
payroll taxes and fringe benefits for the 1998 Nine Month Period consisted of
$72,000 for non-officer salaries, $8,000 for payroll taxes and fringe benefits
and $544,000 for employees who were terminated during the 1998 Nine Month
Period.
Consulting fees decreased $101,000, or 56%, from $179,000 for the 1998
Nine Month Period to $78,000 for the 1999 Nine Month Period. On April 20, 1999,
Seymour Richter resigned as the Company's president and chief executive officer.
Simultaneously with his resignation, Mr. Richter entered into a nine-month
consulting agreement with the Company pursuant to which he will receive an
aggregate of $56,000. Other consulting fees paid during the 1999 Nine Month
Period were $22,000 paid to a consultant in connection with the closing of the
Company's New York offices. During the 1998 Nine Month Period consulting fees
consisted of $113,000 paid to a consultant who was evaluating financing sources
for potential acquisitions, $50,000 accrued pursuant to a consulting agreement
with Mr. Schiller, $15,000 for amounts paid to Mr. Gerry Kay, a former director
of the Company and $1,000 paid to a computer consulting firm.
Professional fees increased $54,000, or 8%, from $717,000 for the 1998
Nine Month Period to $771,000 for the 1999 Nine Month Period. During the 1999
Nine Month Period, the Company incurred legal fees of $274,000 related to the
disposal of Arc Networks, Trans Global and Netsmart shares, $155,000 related to
litigation settlements, $36,000 related to the July 22, 1999 shareholders
meeting, $22,000 related to the April 1999 change of control and $160,000
related to general matters. During the 1998 Nine Month Period, the Company
incurred legal fees of $233,000 in connection with the change of control that
occurred in April 1998, $171,000 related to litigation settlements, $111,000
related to the disposal of subsidiaries and $144,000 related to general matters.
During the 1998 Nine Month Period, the Company paid approximately $50,000 to
each of Edward D. Bright, the Company's Chairman of the Board at the time of the
payment and Patterson Travis Operating Account, a brokerage firm that represents
certain shareholders of the Company for reimbursement of legal expenses incurred
in connection with the April 1998 change of control. Audit, accounting and tax
service expenses amounted to $124,000 for the 1999 Nine Month Period and were
incurred primarily in connection with the disposal of subsidiaries. Audit and
tax services for the 1998 Nine Month Period amounted to $58,000.
-23-
<PAGE>
Gain (Loss) on Marketable Securities
During the 1999 Third Quarter, the Company realized gains of $315,000
from the sale of Netsmart common stock and $70,000 from the sale of US Treasury
Bills. During the 1999 Nine Month Period the Company realized gains of $1.3
million from the sale of Netsmart common stock and $168,000 from the sale of US
Treasury Bills. During the 1998 Third Quarter and the 1998 Nine Month Period,
gains and losses on marketable securities were not significant
Loss from Continuing Operations
The Company's consolidated income (loss) from continuing operations for
the respective 1999 and 1998 Third Quarters was $3,000, or $0.00 per share, and
($1.2 million), or ($0.73) per share, representing an increase in income of $1.2
million. The Company's consolidated (loss) from continuing operations for the
respective 1999 and 1998 Nine Month Periods was ($529,000), or ($0.34) per
share, and ($4.9 million), or ($3.01) per share, representing a decrease in loss
of $4.4 million. As more fully described in the preceding paragraphs, the
decrease in losses from continuing operations is primarily the result of
significant gains on marketable securities realized in the 1999 periods, the
significant reduction in contract termination expense from the 1998 to 1999
periods and to a lesser extent, a reduction of operating expenses from the 1998
to 1999 periods. Due to the non-recurring nature of realized gains on marketable
securities and contract termination expense, future reductions of operating
losses cannot be assured.
-24-
<PAGE>
Discontinued Operations
The Company's income (loss) from operations of discontinued segments
and gain or (loss) on disposal of segments are presented in the following table.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (Loss) from Discontinued Operations:
Contract Engineering Services -- $ 112,000 $ 499,000 $ 275,000
Telecommunications -- (607,000) -- (1,204,000)
Medical Diagnostics -- (71,000) -- (529,000)
Intercompany Transactions -- 71,000 138,000 162,000
------ -------------- -------------- --------------
-- $ (495,000) $ 637,000 $ (1,296,000
====== ============== ============== ==============
Gain (Loss) on Disposal of Segments:
Contract Engineering Services -- -- $ 759,000 --
Telecommunications -- -- 7,365,000 --
Medical Diagnostics -- -- -- $ 4,882,000
Three Dimensional Products and Services -- $ 10,000 -- 1,942,000
Electro-Optical and Electro-Mechanical Products
Manufacturing -- -- -- (31,000)
Business Consulting Services -- -- -- (1,000)
-------------- -------------- --------------
-- $ 10,000 $ 8,124,000 $ 6,792,000
============== ============== ==============
</TABLE>
Extraordinary Gain on Debt Extinguishment
On August 12, 1998, IMI consummated a settlement with the holders of
certain subordinated promissory notes which were issued by IMI in 1994 in
connection with the acquisition of the Medical Diagnostics segment. The Company
paid approximately $1.9 million in full settlement and satisfaction of the
approximate $7.7 million outstanding balance of such notes, of which
approximately $1.6 million was paid in cash and approximately $324,000 was
applied in payment of certain promissory notes due to IMI by one of the holders
of the subordinated promissory notes. In connection with the settlement, the
Company issued 11,100 shares of its common stock, valued at $80,000, to the
holders of the subordinated promissory notes in satisfaction of IMI's
contractual obligations under the agreements relating to the 1994 acquisition of
the Medical Diagnostics segment. In connection with this settlement, the Company
recognized an extraordinary gain on debt extinguishment of approximately $5.6
million for the 1998 Third Quarter and the 1998 Nine Month Period.
Net Loss
As a result of the foregoing, the Company incurred net income during
the respective 1999 and 1998 Third Quarters of $3,000, or $0.00 per share, and
$4 million, or $2.43 per share and net income during the respective 1999 and
1998 Nine Month Periods of $8.2 million, or $5.26 per share, and $6.2 million,
or $3.76 per share.
-25-
<PAGE>
Future Operations of Sagemark
As of the date of this report the Company does not have any
consolidated operating subsidiaries that are not classified as discontinued
segments. As a result, the Company will have no operating revenues, direct costs
or gross profit until such time, if ever, that other subsidiaries are acquired.
Currently the Company has no definitive plans for any acquisitions. The future
operating losses of the Company will be comprised of its general and
administrative expenses, which currently consist primarily of salaries and
related taxes and fringe benefits, professional fees and other general and
administrative costs. As of September 30, 1999, the Company has five employees
with annual base salaries aggregating approximately $550,000, excluding payroll
taxes and fringe benefits. Professional fees will vary depending on the level of
future litigation, acquisition and other activity. The current sources of income
for the Company are earnings on the US Treasury Bill investments and its
investments in Netsmart and Trans Global and the Company's money market account,
which in the aggregate are expected to be significantly less than the Company's
operating costs. As a result, it is estimated that the Company will incur
operating losses at least until such time, if ever, that acquisitions of new
subsidiaries are made.
Investment Company Act
In the absence of an applicable exemption or administrative relief, the
Company might be required to register as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), because more than
40% of the value of its assets other than government securities, cash and
temporary investments would be invested in securities of companies which are not
majority owned by the Company. The Company would then be subject to the
restrictions and limitations imposed by the 1940 Act on the activities of
registered investment companies. The Company has elected to utilize, however,
the exemption from the provisions of the 1940 Act provided by Rule 3a-2
promulgated thereunder by the Securities and Exchange Commission because the
Company intends to become primarily engaged in non-investment company operating
businesses within one year of the date that it ceased to be primarily engaged in
an operating business. No decision has been made to date with regard to the
nature of the operating business or businesses to be acquired or as to any
specific acquisition opportunities. In the event that the Company does not
become primarily engaged in such businesses within one year, it may be required
to register as an investment company under the 1940 Act.
During the one-year period in which the Company will be seeking
opportunities for the acquisition of non-investment company operating
businesses, the Company's cash and investment securities, other than the stock
of any operating subsidiaries that it may acquire or establish, will be invested
in a manner consistent with the preservation of principal in liquid
fixed-income, high-grade, short-term instruments which are expected to provide
relatively low fixed-income yields.
-26-
<PAGE>
Year 2000 Issues
Many existing computer programs use only two digits to identify a year
in a date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. This is referred to as the "Year 2000 Issue". Management believes that all
of the in-house computer applications used by the holding companies (Sagemark
and SISC) are year 2000 compliant. The Company is reliant on other outside
services, including banks and a payroll servicing company and such companies
have indicated that they are taking appropriate measures to be year 2000
compliant. Although the Company believes it will not incur significant expenses
to become Year 2000 compliant, no assurance can be given that the Company will
not incur significant cost in addressing the Year 2000 Issue or that the failure
to adequately address the Year 2000 Issue will not have a material adverse
effect upon the Company.
-27-
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On July 22, 1999, the Company held its annual stockholders meeting. The
results of the matters voted on at the meeting are presented in the table that
follows.
<TABLE>
<CAPTION>
Votes For Voted Against Votes Withheld Abstentions
<S> <C> <C> <C> <C>
Election of Nominees for Director:
Mr. DeLape 38,310,535 -- 482,330 --
Mr. Young 38,310,535 -- 482,330 --
Approval of a 1 for 30 Reverse Split 38,093,797 621,947 -- 77,121
Amendment to the Company's Articles of
Incorporation Changing the Number of
Authorized Shares of Common Stock from
50,000,000 to 25,000,000
38,098,425 624,205 -- 70,235
Amendment to the Company's Articles of
Incorporation Changing the Name of the
Company to The Sagemark Companies Ltd.
38,314,999 435,061 -- 42,805
Approval of the 1999 long Term Incentive Plan
2,498,098 723,701 -- 16,181,186
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.(1)
(1) Filed only with the SEC in electronic format.
(b) Reports on Form 8-K
1. - Filed an 8-K with an earliest date of event of July 22, 1999, reporting the
results of the July 22, 1999 annual shareholders meeting.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-28-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SAGEMARK COMPANIES LTD.
/S/____________ Chief Executive Officer and Director November 8, 1999
Frank M. DeLape (Principal Executive Officer)
/S/____________ President and Chief Operating Officer November 8, 1999
Richard Young (Principle Accounting Officer)
-29-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,764,000
<SECURITIES> 1,483,000
<RECEIVABLES> 3,226,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,503,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,267,000
<CURRENT-LIABILITIES> 828,000
<BONDS> 0
<COMMON> 16,000
0
3,000
<OTHER-SE> 8,420,000
<TOTAL-LIABILITY-AND-EQUITY> 9,267,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,920,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,000
<INCOME-PRETAX> (529,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (529,000)
<DISCONTINUED> 8,761,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,232,000
<EPS-BASIC> 5.26
<EPS-DILUTED> 5.26
</TABLE>
